Price control in the supply chain – how far is too far?

Thursday 28th April 2016

A common worry of a brand owner when setting up a distribution network is how to protect the brand’s integrity. More times than not, this is directly linked with the prices charged for the goods as businesses want to ensure that their goods do not end up being sold at knock down prices, which can result in the brand being devalued and being seen by the public as ‘cheap’.

This may not always be an issue, especially in the growing world of discount retailers, but for brands with a more high quality target audience, it is vital to maintain a reputation for high quality and this, unsurprisingly, is intrinsically linked to price.

A question we are often asked when advising on distribution arrangements is whether or not the brand owner can specify the prices at which a distributor sells the goods. It is easy to understand why a brand owner would like to do this, as it would enable them to ensure that their goods are not sold for a price which does not reflect their brand image and where they sit (or would like to sit) in the market. However, this would mean that consumers would not be able to shop around for a good deal as the market price would be directly controlled at the top of the supply chain.

Not surprisingly, the Competition and Markets Authority (CMA) is on the side of the consumer and this type of price fixing is unlawful.

So what can be done? Well, brand owners can stipulate a maximum price at which the goods can be resold. They are also permitted to specify a recommended retail price, although distributors do not have to adhere to this. What they can’t do though, is to set a minimum price for the goods. Brand owners can also set up a selective distribution network where they can enforce carefully considered objective criteria on their distributors, which can go some way to help protect the value of their brand.

Failure to comply with these parameters can lead to businesses receiving hefty fines from the CMA, which is what has happened to Ultra Finishing Ltd, a northern based designer and manufacturer of well-known bathroom products. Back in 2012 – 2014 the company admitted to engaging in resale price maintenance in respect of the internet sales of its Hudson Reed and Ultra branded products. They stopped this practice immediately when they realised it was illegal but this has not stopped the CMA imposing a whopping fine of £826,000!